## Facts

- Peter Scheiber, a musician turned inventor, owned U.S. and Canadian patents covering the “surround sound” audio system.
- In 1983, Scheiber sued Dolby Laboratories, Inc., and Dolby Laboratories Licensing Corp. (together, Dolby) for infringing those patents.
- The parties settled the infringement dispute through a license agreement under which Scheiber licensed the patents to Dolby in exchange for royalties.
- The last U.S. patent covered by the license was scheduled to expire in May 1993; the last Canadian patent was scheduled to expire in September 1995.
- During settlement negotiations, Dolby proposed paying a lower royalty rate if the agreement required royalties on all covered patents to continue until the Canadian patent expired, including as to U.S. patents that would expire earlier (and including patents that had already expired).
- Dolby’s stated reason for the longer payment period was that a lower rate would be easier to pass through to Dolby’s sublicensees without resistance.
- Scheiber agreed, and the contract was drafted to require royalty payments through the Canadian expiration date.
- After the U.S. patents expired, Dolby withheld royalty payments.
- Scheiber sued to enforce the license agreement as a contract; federal jurisdiction was based on diversity of citizenship.
- Dolby defended by arguing that, under *Brulotte v. Thys Co.*, 379 U.S. 29 (1964), a promise to pay royalties after patent expiration is unenforceable as patent misuse.
- The district court granted summary judgment for Dolby based on *Brulotte*.
- Scheiber appealed.

## Issues

1. Does *Brulotte v. Thys Co.* render unenforceable a license term requiring royalties to be paid through the expiration of a later-expiring Canadian patent, even though some licensed U.S. patents expired earlier?
2. Did the parties’ agreement, properly read in context, obligate Dolby to keep paying royalties through September 1995?
3. If *Brulotte* applies, does it bar enforcement of the agreement in this diversity contract action based on Dolby’s patent-misuse defense?

## Decision

- The Seventh Circuit reversed the district court’s grant of summary judgment and remanded.
- The court concluded that the parties’ bargain called for royalty payments to continue through the expiration of the last Canadian patent.
- The court treated the lawsuit as a contract dispute, noting that it did not “arise under” federal patent law and that a federal defense (such as patent misuse) does not supply patent-question jurisdiction.
- While acknowledging that *Brulotte* is binding Supreme Court precedent, the court declined to extend *Brulotte* beyond what it actually decided and distinguished the agreement before it.
- The court reasoned that the royalty schedule could operate as a payment-timing device tied to a discounted rate (a longer period in exchange for a lower rate), rather than as an effort to collect for post-expiration use of the invention under U.S. patent law.

## Legal Principles

- A suit to enforce a patent license agreement is generally a state-law contract action and does not automatically arise under federal patent law; diversity jurisdiction may support federal jurisdiction.
- A federal defense, including patent misuse, does not create federal patent-question jurisdiction.
- Under *Brulotte v. Thys Co.*, a patentee cannot use a patent to extract royalties for use of the invention after the patent expires; lower courts must follow Supreme Court precedent.
- Not every payment obligation that extends beyond the expiration of a particular U.S. patent is invalid on its face; courts may treat some extended payment schedules as deferred compensation for rights granted during the patent term, depending on how the bargain is structured.
- In a license covering rights in more than one country and more than one patent, a royalty term pegged to the last-expiring covered right (here, a Canadian patent) can be enforceable where it reflects the parties’ negotiated exchange and does not function as a restraint on post-expiration use under U.S. patent law.
- Contract interpretation looks to the agreement’s language and the deal the parties struck; a court should not rewrite a royalty term that the parties set as part of a negotiated rate-and-term trade.

## Conclusion

The Seventh Circuit held that Scheiber and Dolby bargained for a lower royalty rate in return for royalties running through the expiration of Scheiber’s last Canadian patent, and it reversed summary judgment for Dolby because *Brulotte* did not require voiding that payment structure on these facts; the case was remanded for further proceedings consistent with enforcing the agreement’s royalty term.


Scheiber v. Dolby Laboratories, Inc., 293 F.3d 1014 (2002)